Baron Oil terminates Peruvian farm-in deal with Union

Baron Oil has terminated a farm-in agreement (FIA) with Union Oil & Gas Group (UOGG) for a working interest share in Block Z-34 offshore Peru. 

Baron said on Monday that the company took back its full 50 percent as a result of the termination. The initial FIA was supposed to increase UOGG’s stake to 80 percent.

Baron explained that, after several months of discussion and negotiations, it decided to pursue no legal action to wind up UOGG in the British Virgin Islands, since the corporate structure there has no financial assets held in the company.

To remind, UOGG failed to meet its financial obligations for the farm-in following the approval of the public deed in February 2017. That meant that completion of the farm-in did not take place under the terms of the agreement.

In turn, a termination agreement has been agreed between Baron and UOGG with effect from September 8, 2017.

One of the reasons for not pursuing legal action pointed out by Baron was the fact that it would negatively impact the status of the contract license for the block. Since there is a short time frame remaining on the contract, Baron saw it as essential to resolve matters with UOGG in a way which enabled the company to play a full part in ongoing operations.

The contract operating agreement between the two companies was terminated at the end of April, and no funds have been received by Baron from UOGG since then.

As the companies agreed to the termination agreement, UOGG has no liability to pay the $2 million that should have been paid on completion. The net cash effect of this on Baron, taking into account local taxes and other costs that would have been payable is a $1.16 million net loss to the company’s projected cash reserves.

Costs incurred under the FIA from April to August 2017 will still be due from UOGG but, as from September 8, all costs on Z-34 will be shared 50:50 between Baron and Plectrum Petroleum Succursal del Peru (a wholly-owned subsidiary of UOGG).

Baron and UOGG will together take steps to reverse the effect of the public deed executed in February 2017, the company added.

Bill Colvin, chairman of Baron, said: “UOGG’s failure to abide by the terms of the FIA was extremely disappointing, placing Baron in a very difficult position, and the termination agreement is not the best financial outcome for Baron.”

Colvin also added that to take any other route would be likely to destroy all remaining value in Block Z-34 and the company would still be highly unlikely to recover any funds that would have been due to the company under the FIA.

“In addition, Baron faced the possibility of a 32% tax charge in Peru whether or not UOGG paid the US$2 million.

“At this critical stage in operations on the block, it is essential that the partners work as closely together as possible on the farm-out negotiations and try to preserve the value of the block.”

According to Baron’s estimates, the block holds a total of 885 million barrels of oil recoverable, 413 of which are estimated to be in the Cuy prospect.